Attracting long-term funds: Global investment stars aligned with India
When it comes to fiscal stimulus, the pandemic-stricken world looks like a déjà vu (by a huge multiple) of the 2008 financial market implosion when it comes to cheap money raining down from the treasury coffers. from the wealthy governments of the United States, the United Kingdom, Europe and Japan. While most of these measures are aimed at immediately reviving commercial activities in the respective markets, the reality of the financial markets dictates that a certain proportion of this excess liquidity would be deployed in investment avenues outside the national markets. It seems fair to assume that apart from an overhaul of supply chain dependencies by multinational manufacturing companies, global institutional and alternative investment funds would also consider diversifying their investments.
India has announced a new opening of sectors such as insurance and defense as part of its economic stimulus plan. In Budget 2019, a decision to grant a long-term capital gains tax (LTCG) exemption to sovereign wealth funds (SWFs) for investments in specific infrastructure projects over the next three years marked the determination of India to attract long-term and patient, institutional, global investment capital. India now has a unique opportunity to dramatically increase the flow of global long-term capital by extending the LTCG tax exemption to investments of all regulated global alternative investment funds (PE / VCs) in desired sectors – a LTCG potential tax does not arise in the future until the exit of an investment in India by a long-term investor. However, when making an investment, there is no question of taxation. Therefore, there is no immediate loss of tax revenue for the public treasury. It should be noted that alternative investment funds are a major source of global capital ($ 1.5 trillion invested by PEs in 2019), with India’s share exceeding $ 40 billion (EY research for India PE Trend Book 2020). Extending the LTCG tax exemption to these giant global investment institutions, with a relatively patient and long-term investment philosophy, would result in a significant increase in investments without the current tax burden.
Another area is to attract India focused fund managers as well as global funds with a large allocation in India to locate in India. The AUM of REITs in India is close to $ 400 billion (according to the NSDL-FPI Monitor) and that of India-focused REITs alone is estimated at $ 40 billion (EY research). Traditionally, even 100% India focused fund management companies have generally preferred to be located in jurisdictions like Mauritius and Singapore. The fear of subjecting the foreign fund to more unfavorable / uncertain Indian taxation due to the fund management company being located in India and being exposed to the risk of reputed commercial presence / residence in India is one of the reasons. During the former Narendra Modi regime, efforts were made to introduce a mechanism to provide tax security against such a tax impact even if the fund management company were to be located in India. However, due to a long list of requirements, many of which are virtually untenable, there have only been a handful of proposals to locate fund management operations in India. There is an urgent need to make desirable changes, such as dismantling most of these debilitating conditions (for example, a maximum cap of 26% of participation in Indian companies and proof that there is no indirect ownership. , even minority, by Indian residents in the fund abroad). Most of these conditions are not the norm in global fund management jurisdictions like Mauritius and Singapore, which effectively compete with India for such operations. Removing these irritants will not have any negative impact on Indian government revenue.
To conclude, the stars of the global investment industry are aligned with India. By making smart changes to the existing LTCG tax exemption provisions for global investment funds and providing greater clarity and certainty regarding the taxation of those funds investing in Indian companies whose fund management is carried out in India, it is possible to attract a much higher level of long-term global investment flows with minimum cost to the Treasury.
The author is the national tax leader, EY India. Views are personal